In order to prevent things going wrong in a relationship or business, having a shareholder agreement is the first step to set out any business.

A shareholder agreement is essential for any business, no matter the sector in which it operates. Therefore, you can learn all about shareholder agreements here and get a template for your business.

What Is a Shareholder Agreement?

The shareholder agreement is signed between the shareholders of a company. It describes how the company should operate and also lists the duties and responsibilities of each shareholder.

It not only states the rights that a shareholder of a company holds, but also includes information on the management of the company.

When Should I Create a Shareholder Agreement?

The ideal time of using a shareholder agreement is when a company is created and the first shares of the company are issued.

In the process of forming, if the investors find it hard to agree with the terms, it can be a red sign that the future of the company with the shareholders working together will not work well.

There are often cases in which the investors defer creating the shareholder agreement to a later time when the opportunity is ‘more apt’. However, it is important to be solved on time.

Therefore, creating a shareholder agreement at the early stage helps in preventing any disputes that might arise at a later stage, saving the business from unexpected losses.

How Will a Shareholder Agreement Help a Minority Shareholder?

A minority shareholder is someone who owns less than 50% shares of a company. Generally, due to the smaller number of shares, the minority shareholders do not get to have a major say in the goings of the company.

However, a shareholder agreement can prevent this situation. By making certain that minority shareholders can participate in the process of decision making, it protects their interests.

These decisions could involve issuing of new shares, changing of main trade of the company, taking a new loan, etc. They will impact every shareholder, so this agreement will ensure that the minority shareholders are not ignored.

Further, a minority shareholder might also want to add a clause that states that if a majority shareholder is selling their shares, all the other shareholders should get the same offer.

All these clauses of a shareholder agreement protect the interests of the minority shareholder in the company.

How Will a Shareholder Agreement Help a Majority Shareholder?

A shareholder agreement also protects the right of a majority shareholder, by including a clause of ‘drag along’.

This means that if a majority shareholder is selling their shares without minority shareholder’s consent, they will be forced to sell their shares under the provision.

Further, another clause to protect the majority shareholders is to stipulate to whom minority shareholders can sell their shares. This ensures that the shares will not be sold to any competitor of the company or an unwanted party.

How Will a Shareholder Agreement Help Equal Shareholders?

If two shareholders hold 50% shares of the company each, there can often be disputes arising between them. Therefore, a shareholder agreement should detail how these disputes are going to be solved.

If there is an absence of shareholder agreement, the disputes can often lead to improper decisions or inability to make any decision at the right time.

What is Included in a Shareholder Agreement?

In general, here are the commonly used parts in a shareholder agreement:

  • Preamble: It clearly describes the parties which are signing the shareholder agreement.
  • Recitals: They are the clearly explained goals and the motive of the shareholder agreement.
  • Details concerning the buyback of shares: Whether it is optional or mandatory in the event that a shareholder wishes to give up their shares.
  • Right of first refusal: It states that the company has the option to buy the shares of a shareholder prior to an outsider getting the option.
  • Calculation of the fair price of shares: Whether it will be done on a yearly basis or based upon a formula.

There are several other things added in a shareholder agreement, which are important from a legal point of view. Therefore, it is important to have a legal expert check the shareholder agreement before it is put into place.

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Endnotes

If you wanted to know what is a shareholder agreement, now you know all about it. Further, you could download a shareholder agreement or other agreements on CocoSign that you might need for business or personal purposes.

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